Creating a boot CD on a PC can be done; I've done it, but the steps involved have escaped my memory. I remember it involved rather a lot of Googling for instructions, and downloading one or two utilities on the PC side. From memory, you need a CD burning app that can create .iso CDs, such as Nero, and a utility to read and write Mac HFS and/or HFS+ file systems. MacDrive's 30 day free trial did that part for me.

If you have downloaded 7.5.3 from Apple, it may be easier to create a floppy install set than a CD. IIRC, what you will have downloaded is a set of floppy disk images. Searching here should reveal instructions for creating bootable floppies from the images.

I recommend, as porter suggests, backing up the entire existing install of 8.1 to an external Mac formatted SCSI drive. You can format the drive with Drive Setup or Apple HD SC Setup in the Utilities folder of the existing install, or with the tools on the first floppy image. Even then, you will need to boot from the first boot floppy to read the external drive, if the existing install is wiped.

Incidentally, if you end up with a surplus complete and empty TRS-80 Model III shell, please get in touch with me through PM on these forums.